Tax Flattery

Not in our bioregion, but interesting anyway: the L.A. Timesopines that carbon taxes would work better than a cap-and-trade system:

A carbon tax simply imposes a taxfor polluting based on the amount emitted, thus encouraging polluters to clean up and entrepreneurs to come up with alternatives. The taxis constant and predictable. It doesn’t require the creation of a new energy trading market, and it can be collected by existing state and federal agencies. It’s straightforward and much harder to manipulate by special interests than the politicized process of allocating carbon credits.

Note: that’s their opinion, not mine. As for me, I’m confused, and desperately trying to figure out how I feel about carbon taxes vs. cap and trade vs. auctioned credits vs. who-knows-what-else. It’s really, really important stuff, but also (obviously) complicated.

So, dear reader: if you have any comments or preferences you’d like to share here, please do! I’ll promise to read and respond to every one.

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Comments

Jan

May 29, 2007 at 11:02 pm

I grudgingly agree that a carbon tax is better, although I’m concerned about what will be done with the money collected. Dump it into the general fund, to pay for foreign wars? I don’t think so!I also have a personal problem with it—I’m a carbon sink! I want to cash in on carbon trading!But I do agree that “sin taxes” are better in general than “sin trading.”

I’d prefer to see a carbon tax. On the surface, it seems easier to implement, easier to adjust over time, and less open to manipulation. That said, a carbon tax would need to be close to revenue neutral to be accepted. The debate needs to be about offsetting a carbon tax with equitable cuts, or outright elimination, of other taxes.Tax reform anyone?

Auctioned permits have essentially the same economic/incentive impact as a carbon tax, and they set a firm limit on emissions, which a carbon tax does not.But that’s not a vote—just an observation. Others have noted the key advantages of a carbon tax: less susceptible to fraud, gaming, and manipulation.One other observation is that cap and trade allows states and nations to join each others’ carbon markets, which has some interesting advantages.

There is so much going on in the broader debate that its hard limit my post, not to mention get my brain around it.I’m all for tax reform, except that it has little successful history. Or, maybe this is just my experience from having little memory prior to Reagan and the Grinch revolution of the 80s. It could be that, if we keep the topic alive and if political breezes blow just right across the country, the policy palate here and in the other Washington will acquire a taste for taxes as tools. Momentum seems in favor of C, but if Sen Dodd is an advocate, a carbon tax seems a political possibility to me.I’m also not a big fan of markets as solutions to collective or to social problems. I think markets are great for pushing materials and energy through the economy but not for pursuing the public good. I vote for the Pigovian route, even if only because I’ll support loosing political fights that draw more blood from the opposition. Plus, the thought of another market affecting our future makes me sad. Aren’t markets what got us here in the first place?On a more technical level, I’m intrigued by the cap and share concept. And, I could go with a combined trading and tax system. The point about price volatility and investment is one I take seriously and one I’ve not heard trade advocates address.

A carbon tax is an excellent and equitable means of raising revenue to develop and implement climate solutions. But if the goal is to turn the tide on climate pollution and meet emissions reduction targets, a carbon tax is NOT the answer because it doesn’t provide any certainty. How markets will respond to a carbon tax is another kind of experiment – we have to wait and see what the results are, and even then, the results will likely vary over time, depending on the economy and other tax policies. In the meantime the cost of that uncertainty is going up: a future where we can be reasonably certain that by 2035, regional emissions will be 25% below 1990 levels sets parameters for energy, water, land use and economic planners and policy makers. But, a carbon tax doesn’t provide that certainty and so we end up planning and building our infrastructures with huge ranges of variables – which adds huge extra costs.A carbon tax is a good and effective complement to regulating emissions (e.g., efficiency standards) but not a substitute.

By definition a carbon tax would require some standards for measuring the carbon. Why not start with just required labeling, and see what happens in the marketplace (like they are currently discussing in the UK)? There’s no need to institute some government entity if people are allowed to make an educated choice.

A few comments from a former Sightline intern who’s become an environmental economist:1) Maybe Sightline can set up a wiki or something for a more in-depth discussion of carbon taxes ? I’ve done a bunch of thinking about this and would love to share it with interested folks in a more structured environment. Alternatively, any of you who are interested can send me your emails (I’m at yoram AT smallparty.org)—I’m sure we can figure out something.2) A carbon tax is essentially identical to a cap-and-trade system in which the permits are auctioned by the government. If government auctions off X permits that sell for $Y, this is identical to a carbon tax of $Y. The only major difference stems from the X-Y connection being unclear: with a carbon tax, you know the price will be $Y, but you don’t know the quantity (X). With an auctioned permit system, you know that there will be X units of emissions, but you don’t know the price ($Y) at which they will trade.3) Grandfathered cap-and-trade is essentially identical to a carbon tax where you distribute the revenue in lump-sum fashion on the basis of historic emissions.4) Economists tend to prefer auctioned cap-and-trade to grandfathered cap-and-trade. Since auctioned cap-and-trade is so similar to a carbon tax, there’s no strong economic reason to prefer one to the other, but as a political matter I think carbon taxes are preferable for all the reasons cited above.5) I disagree with “Fish out of water” about certainty: a carbon tax would provide price certainty. At well-defined price points, utilities would to shift from investing in coal plants to investing in natural gas plants and/or wind/solar/conservation/etc.6) I disagree with dalynnmail-news about labeling. There’s already plenty of labeling, e.g., fuel-economy standards on cars.

As noted above by dalynnmail-news, there must be an accepted standard of measurement. The are some highly regarded entities that assemble marketable packages of carbon today, but the current scene generally has less rigor than needed for any of the systems to function properly. What do you measure? How do you measure it? Who is responsible? When is it verified?

1 – For the moment, I disagree with the position Yoram presents in #2 in that who pays for their emissions is very different in the two scenarios. Around these parts, electricity generation and industry account for only about a quarter of our CO2 emissions. Transportation dominates, producing half our impact, and agriculture and buildings (probably natural gas) contribute about a quarter. If C can’t affect micro emitters, what are we to do about them? How will a C/T system influence our emissions here in the Puget Sound? 2 – Might C/T tip competitive advantage toward unaffected sectors? Even more interestingly, what if energy companies negotiate carbon sinks into the equation? 3—No one on the outside is supporting grandfathered permits, but you never know what might be negotiated in private.

Yoram – the price may be certain – but that doesn’t provide any certainty in price response. And, as someone else pointed out here, fossil fuel used to produce electricity accounts for less than half of our regional emissions. If we count on carbon taxes to reduce our transportation fuel use, then I think I can be certain that we won’t reach our emission reduction targets. And, finally – which do you really think is going to get our utilities to invest in conservation and renewables with any certainty – your preferred approach, a carbon tax, or my preferred approach, regulation, ala Initiative 937?

1) Fish, I agree that responses to taxes are not quantifiable, at least not in such a complex sector as energy use. However, I pointed to our energy consumption patterns as an illustration of how a C/T system will likely miss large portions of carbon emitting activities, like transportation and heating buildings and homes. 2) I think for agents in a position to change technologies rapidly, price points exist. But, adoption and diffusion seem sticky in many areas. I recently listened to a presentation about solar in Washington and how recent policy changes here and elsewhere (England) haven’t lead to ‘rational’ decisions to invest in solar. Rather, social and non-rational factors predominate, like imitation, historical relationships among contractors and suppliers, a lack of common knowledge or awareness and expectations about resale value.3) My preference would be to establish reduction goals for different sectors in the economy and select policies accordingly. Public utilities and raw materials suppliers, for example, would be subject to a C/T regime and a carbon tax would be applied to hydrocarbon fuel suppliers. Additional policy tools, mainly carrots, could be used in other sectors as appropriate.

Looks like I’ve gotten behind on my promise to respond to every post.Alan, Yoram, etc.Yes, in theory, carbon tax = auction = grandfathered cap and trade. But I think that when most people think “tax” they mean a system in which the price of emissions is fixed in advance, and changes in a fairly predictable way over time. (Maybe adjusted somewhat, but not $20 per ton one year, $250 the year after, and $35 the year after that.) So maybe for the sake of clarity, maybe we should be clearer that:1) tax = emissions fees set by legislation or administrative fiat, with fees reverting to the public fisc2) cap & auction = emissions fees set by a market, but with very high likelihood of reaching climate goals3) grandfathered cap & trade = emissions fees set by a market, with fees effectively refunded to the biggest emitters in the past.bahouse – I’m not sure I understand your vote, so is this accurate? You’re pro-taxes, possibly in conjunction with a cap, and also in favor of regulations (efficiency standards and the like)? I’m not sure what you mean when you say “no one on the outside is supporting grandfathered permits”. That’s largely how the Northeast Regional Greenhouse Gas Initiative works—only 25% of credits are auctioned. And I think that Environmental Defense and NRDC are in favor of grandfathering, as they feel that it’s the most politically salable option.Fish out of water – is your vote tax + standards? Or do you feel that the uncertainty in the effectiveness of a tax is enough to tilt you in favor of some form of cap & trade?

I think regulations provide the most certainty and public benefit. (e.g., the state energy code, the Clean Car Standards, I-937, the appliance efficiency standards and most recently the emissions performance standard will all produce quantifiable and predictable emissions reductions.) I think a carbon tax complements regulations – it adds another price signal about the true cost of fossil fuel and it provides a needed and equitable source of revenue to implement other climate protection measures. And as for how a cap and trade system fits into all this, I just don’t know enough about how an auction system would work with our hydro based economy – and how it would apply to sectors other than utilities. Bottom line – I agree with each of the points that the LA Times makes in favor of a carbon tax —just that we don’t have time to test the theory, to see if people and business will do what’s in their own economic interest. So, yes to a carbon tax – so long as it goes with something else that provides certainty in reducing emissions.

My vote changed – I waffled. My final answer today – I like C/T for some sectors like electricity, a carbon tax for non-point sources like transportation and buildings and other regulatory tools, which I don’t know at this point what they might be, for other sectors like agriculture or the cement industry. Using C/T for electricity generation makes a great deal of sense to me. As the report cited below mentions, states are already closely involved with electricity production and there are few plants in total. However, C/T has no chance of touching the transportation sector, except for possibly mass transit, large freight companies, etc. C/T also has no chance of touching commercial and residential heating. I spoke incorrectly about who is or is not supporting grandfathering. In my crash course reading, I missed a great deal. Thanks for introducing the RGGI.I notice that RGGI uses a mix of grandfathering and other methods of allocating permits. According to a Muskie School report, “…CO2 emissions from the electricity generating sector are capped within each state at approximately 2006 levels. The state then sets compliance requirements for each regulated power plant (p4)”. So, grandfathering was used to get states to sign on, and they are allowed to figure out for themselves how to hit their targets. “The states have agreed to set limits on emissions and then auction, sell, or give away tradable allowances … Each state is required to sell or auction a minimum of 25% of its allowances and use the proceeds for strategic energy or consumer benefit purposes such as energy efficiency, rate-payer rebates or new clean energy technologies. … RGGI specifies a number of categories of offset allowances, such as planting trees to absorb carbon (p1)”.So now Clark, you have votes from two more people…….

bahouse – thanks! that makes sense. FYI – apparently, Massachusetts plans to auction 100% of its credits under the RGGI—so grandfathering isn’t much of an issue there. On the other hand, some US environmental organizations favor grandfathering, since (1) it fits in well with the European system (which has its flaws, obviously, but may prove redeemable in the end), and (2) it’s “realistic,” in that it’s probably the only system that existing utilities and energy industries won’t attempt to torpedo.

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